Using and extended enterprise model to increase responsiveness

Abstract

OEMinc's new business model is a dramatic departure from that used in the past. The company has moved steadily upstream in the supply chain, leaving more and more of the manufacturing effort to suppliers. Literature shows that extraordinary productivity gains in the production network, or value chain, are possible when companies are willing to collaborate in unique ways, often achieving competitive advantage by sharing knowledge, research and assets. For its newest product, Excelsior, OEMinc has moved to an extended enterprise model involving dozens of Partners. Approximately half are Component Partners (CPs), who supply systems and components. The remainder are Assembly Partner's (APs), who integrate these components into sub-assemblies. Many components are purchased by OEMinc and drop-shipped by CPs to APs, then installed in subassemblies. For the purposes of this analysis, Critical Safety Inventory is defined as inventory held at a site that buffers against disruptions in quality or upstream delivery and is not needed for production at that time.

(cont.) More specifically, the need for CSI is driven by the following: *variability in delivery time, resulting in late parts at the AP site or at OEMinc; *part non-conformances, which result in parts being unavailable for installation; and/or *part damage upon installation. The challenge OEMinc faces, which this project attempts to address, is: "How can OEMinc mitigate supply chain risk in the context of reduced information and control?" This project focuses on inventory management as a tool for mitigating risk. Therefore, the project definition has been further defined as follows: To develop an effective safety inventory policy for OEMinc-owned, drop-shipped components within the Excelsior Supply Chain, with the goal of supporting production, reducing inventory cost, and enabling continuous improvement. As outlined above, OEMinc's move to the extended enterprise business model is a significant step towards its vision of being a large-scale systems integrator. The success of this transition is important for OEMinc's long-term future, in addition to being an enabler for the Excelsior. The following approach was used: 1) Case Studies: Components were selected based on characteristics that bracketed the types of issues that might be seen in the supply chain at OEMinc.

(cont.) It was expected that examination of these supply chains would reveal particular issues representative of a wider selection of components. 2) Simulation analysis: A generic simulation model was created for components under the Excelsior Business model. The simulation was used to determine how many shipsets of inventory should be held at the AP site for a varying lead times, expedite lead times and risks of non-conformance. 3) Benchmarking: Representatives of peer companies were interviewed and site visits were conducted to gather information on how they manage their relationships with partner suppliers, with special attention paid to inventory management, partner management, incentives and data exchange. 4) Metrics Analysis: OEMinc's existing metrics system was assessed to determine what changes might be made given the business model shift for the Excelsior program. 5) Implementation: Based on the results of the preceding steps, a set of guidelines was developed for Partners to reach the desired state with respect to CSI management. Using a Systems Dynamics framework, the supply chain was analyzed to determine what incentives should be applied to encourage the desired supplier behavior.